Supreme Court’s Recent Judgement On Benami Transactions May End Up Sharpening Government Scrutiny Of Post-DeMo Deals

Action on benami transactions that occurred before 2016 may be practically impossible now, after a recent judgement of the Supreme Court.

However, one unintended consequence of the same judgement might be that the entire focus of the law-enforcement agencies now lands on benami transactions that occurred in 2016 or later.

Recently a three-judge bench of the Supreme Court comprising of the then CJI NV Ramana and Justices Krishna Murari and Hima Kohli held unconstitutional some provisions of the Benami Transactions (Prohibition) Act, 2016 and quashed proceedings which arose out of benami transactions carried out between 1988 and 2016.

The court held Section 3(2) of the unamended Benami Property Transactions Act, 1988 as unconstitutional.

Section 3(2) is a penal provision and provides for punishment to persons who enter into benami transactions. The provision, without any changes, was added within the 2016 act.

Now, as soon as the provision was declared unconstitutional in the unamended act, it became a new addition with respect to the 2016 act. And henceforth, if the state prosecutes someone for a benami transaction between 1988 and 2016, it would be considered a retrospective application of a penal provision.

This is not allowed under Article 20(1) of the Constitution.

The court further held that criminal proceedings cannot be initiated for transactions entered prior to the enactment of the 2016 act, therefore all proceedings for transactions between 1988 and 2016 have been quashed.

Section 5 of the unamended Act of 1988 which provided for confiscation of properties was also declared unconstitutional.

As under Article 20(1) of the Constitution, a civil provision can have retrospective application.

However, the court held that confiscation under Section 5 was punitive in nature and not civil.

Therefore, Article 20(1) would apply and no property can be confiscated retrospectively.

Hence, all confiscation proceedings for cases between 1988 and 2016 were also quashed.

The primary argument raised on behalf of the government was that there was no machinery in place to effectuate proceedings against benami transactions in the 1988 act and to remedy that, the 2016 amendment was brought in.

It was submitted that no offence was sought to be implemented retrospectively, but only procedures to implement the 1988 act were laid down under the 2016 amendment.

Furthermore, it was rightly argued that confiscation under the act was not penal; it only has civil consequences and therefore, can be applied retrospectively.

It can be said that the Supreme Court’s reasoning in this case was based on minor technicalities. The provisions under the 2016 act were perfectly fine and only in furtherance of the 1988 act.

There was no retrospective application of penal provisions under the 2016 act, as penal provisions were already there in the 1988 act which provided for punishments up to three years.

With all due respect, the only possible way for the Supreme Court to quash proceedings for transactions between 1988 and 2016 was to first declare the provision under the 1988 act as unconstitutional and then hold that under the 2016 act no new penal provision can be introduced with retrospective application.

The fact that the 1988 act was not challenged till date was a good enough presumption in favour of constitutionality of the act.

How will this ruling impact Prime Minister Narendra Modi’s war on corruption?

This ruling will be a blow to Prime Minister Modi’s anti-corruption policy.

Firstly, all proceedings between 1988 and 2016 will get quashed.

Secondly, several provisions have been declared unconstitutional, therefore there’s no certainty on how the future proceedings will go on.

However, as a result of this, all the focus of state action against benami transactions will now shift to dealings that took place 2016 onwards.

That is the year when the demonetisation occurred.